Q4 Outlook: Entering the final stretch

10.11.18

Economic growth is poised to finish the year strongly with global inflation remaining somewhat tepid. We remain resolute in our belief that global gross domestic product (GDP) is on track for a 3.7% growth rate in 2018, taking into account some minor downward revisions to our forecast because of isolated emerging market weakness.

Recap of key economies

Buoyed by reduced tax rates, continued deregulation and higher government spending, U.S. GDP growth appears to be the safe haven on the global economic stage. Domestic capital expenditures (capex) continue to be strong and small business confidence is at an all-time high. In addition, consumer spending has held up well despite higher gasoline prices. We believe the U.S. growth rate will average around 3% annualized in 2018.

The deterioration in eurozone economic data seems to be waning following an agreement between the U.S. and European Union (EU) to discuss a reduction in tariffs on industrial goods. Brexit negotiations between the U.K. and EU continue to be choppy, which has caused some delays in anticipated capex spending for the eurozone. While we believe the two parties will come to a resolution for the U.K.’s exit from the EU prior to the March 2019 deadline, the ongoing negotiations may cause lingering economic tumult until a deal can be reached. We continue to expect GDP growth at an average annual rate around 2% in 2018.

While the European Central Bank reduced the amount of its asset purchases during the third quarter, it has committed to keeping rates low for an extended period. We think that decision is likely to continue to support the EU economy. In addition, the Bank of England recently raised interest rates and we think it is set to continue increasing rates gradually, barring any unforeseen Brexit issues.

The focus of late has been on emerging markets. China’s economy has been weaker because of a combination of deleveraging and new pollution controls on industries there. These factors, coupled with concerns about an escalating trade war with the U.S., have pushed China’s policymakers to begin to ease policy. We believe recent announcements of tax cuts and increased infrastructure spending in addition to lower interest rates will stabilize China’s economy during the fourth quarter.

Currency crises plagued Turkey and Argentina throughout the third quarter, which sent tremors through other emerging market economies, including South Africa. Emerging markets continue to face headwinds from the international trade uncertainty and a strong U.S. dollar. We believe emerging markets continue to offer sound investing fundamentals; however, market volatility is likely to persist until there is more clarity on the risks.

Steady global GDP growth
Chart showing Steady global GDP growth

Source: 2017, International Monetary Fund actual data; 2018, Ivy forecast

A shift in U.S. monetary policy?

As widely expected, the U.S. Federal Reserve (Fed) in September increased the benchmark federal funds interest rate by 0.25 percentage point to a range of 2.00–2.25%. We anticipate the Fed will raise rates again in December with the possibility of up to two rate hikes in 2019, based on its forward guidance.

Another noteworthy outcome from the September Fed meeting was the elimination of its longstanding reference to “accommodative” monetary policy. We believe this implies the Fed is comfortable with the recent rate increases and those planned over the next 12 months, given that financial conditions continue to support economic growth.

Possible progress on trade

Trade continues to be our main concern as the Trump administration places great emphasis on U.S. trading relationships, but to mixed reviews. China remains the primary focus of President Donald Trump’s protectionist trade policy.

To date, the U.S. has levied tariffs on $250 billion worth of Chinese goods — or approximately one-half of the goods imported from China — with threats of more to follow. Despite the continued verbal saber-rattling from both countries, we still believe an all-out trade war can be avoided, especially if China grants greater market access to the U.S. and addresses the administration’s concerns over intellectual property.

After months of sometimes highly contentious negotiations, the U.S. reached a deal with Mexico and Canada designed to replace the North American Free Trade Agreement. Highlights of the new pact, known as the United States Mexico Canada Agreement (USMCA), include changes to the rules on auto manufacturing as well as access to the Canadian market for U.S. dairy farmers. The USMCA must now go through U.S. Congressional approval, where confirmation could be lengthy, but looks likely as there are provisions both Republicans and Democrats can support.

Despite the ongoing global trade tensions and other geopolitical concerns, investors appear to have adjusted to the volatility of the current market environment. The S&P 500 Index, which ended the third quarter with its best quarterly performance in five years, posted positive gains for six months straight between April and September. This marks only the sixth time since 1928 that the index scored such a streak for that time period.

With economic growth on track, it appears that market gains, robust corporate earnings and a strong job reports are offsetting concerns of a global trade war. However, we continue to worry that an escalating and ongoing trade conflict with China could dampen business confidence, stunting both U.S. and global economic growth. If the trade conflict spreads to other countries, the damage could be amplified.


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The opinions expressed are those of Ivy Investment Management Company and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through October 2018, are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This commentary is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon.

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